Which term best describes the increased risk individuals take when insulated from costs?

• A. Adverse selection
• B. Cost-effectiveness
• C. Moral hazard
• D. Utility

Answer: (C)

The term that best describes the increased risk individuals take when insulated from costs is moral hazard. This concept emerges primarily in scenarios where an individual or entity does not bear the full consequences of their actions, leading to riskier behavior than would typically occur if they were fully exposed to the costs involved.

For instance, when individuals have health insurance that covers substantial portions of their medical expenses, they may be more inclined to seek unnecessary medical services or engage in riskier health behaviors, as they do not directly experience the financial repercussions. This shift in behavior due to the safety net provided by insurance is a classic case of moral hazard.

Moral hazard contrasts with the other terms provided. Adverse selection refers to a scenario where the insured individuals hold more information about their health risks than the insurer, leading to a situation where those most likely to use insurance are the ones most inclined to purchase it. Cost-effectiveness relates to evaluating the relative costs and outcomes of different healthcare interventions, while utility is a broader economic concept that refers to the satisfaction or benefit derived from consuming goods and services, rather than specifically addressing risk behaviors associated with cost insulation.